On July 19th, Nevada Senate Republicans and three businesses filed a lawsuit in state court challenging two bills that will increase the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden on Nevada taxpayers.
The first bill, SB 542, enacts a two-year extension of the expiring technology fee collected by the Department of Motor Vehicles on certain transactions. The second bill, SB 551, eliminates revenue triggers designed to reduce payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. rates subject to revenue availability, and instead extends the current rates indefinitely.
The legal argument hinges on the Nevada constitution’s requirement that a two-thirds majority in each chamber of the legislature must pass a bill which “creates, generates, or increases any public revenue in any form, including but not limited to taxes, fees, assessments and rates, or changes in the computation bases for taxes, fees, assessments and rates.” The plaintiffs argue that SB 542 and SB 551 violate this constitutional provision because they increase public revenue without two-thirds approval in the Senate.
The initial consensus among legislators seemed to be that these changes would need two-thirds support, despite the state’s legislative counsel opinion stating that the bills do not trigger the two-thirds majority requirement. Any consensus that existed conveniently disappeared after it became clear that two-thirds of senators would not cast an affirmative vote.
This issue is not exclusive to Nevada, nor are constitutional provisions requiring heightened thresholds for revenue bills uncommon. Other states like Oklahoma and Oregon have addressed similar procedural challenges to revenue bills but their constitutional language is not as clear or robust.
This lawsuit exemplifies the pervasive tension in tax law between economic realities and artificial legal distinctions. From an economic perspective, eliminating a scheduled tax reduction has the same effect on revenue as enacting a tax increase that will take effect in the future.
No one disputes that a freestanding bill raising the payroll tax rate or levying a technology fee on certain transactions would require two-thirds support. Yet SB 542 and SB 551 accomplish these same ends. This is nothing more than an end run around the two-thirds majority requirement and allows simple majorities to nullify Nevada’s constitutional obstacles to tax increases.
It would be an artificial legal distinction to say that suspending or eliminating a future revenue decrease is not the same as enacting a revenue increase. The two-thirds majority requirement loses much of its force if a scheduled tax reduction can be removed by simple majority as long as the revenue impacts have not yet taken immediate effect. Only a strict, tortured interpretation of “creates, generates, or increases any public revenue” would validate SB 542 and SB 551.
Simply put, these bills will increase the tax burden on taxpayers from what it otherwise would have been. If not for these bills, Nevada would receive less revenue, thereby making SB 542 and SB 551 legislative actions that increase revenue. This lawsuit seeks to affirm this economic reality as central to the constitution’s requirements.
Taxpayers anticipate upcoming changes in the tax code. Scheduled changes can influence economic behavior before taking effect, and suddenly repealing those changes pulls the rug out from under taxpayers who expected and planned for a tax reduction. The legislature is not constrained to abide by its past revenue decisions, but it cannot initiate revenue hikes without following the prescribed constitutional procedure.
The Nevada constitution protects taxpayers by making it more difficult for legislators to raise public revenue. The Nevada courts should uphold this protection not just in theory but also in practice.
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